Outlooks Remain Generally Optimistic Across the Board

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic ReviewWorld stocks dipped on Friday but were set for a second week of gains after a strong start to the global earnings season. The MSCI All-Country World Index, which tracks shares in 47 countries, dipped 0.3% on Friday, but remained on track for a 1% gain for the week. Global markets are recovering from a turbulent first quarter which saw a return of volatility, an intensification of trade tensions between the U.S. and China and conflicts in the Middle East. Some economist’s base case assumes that current tensions between NATO and Russia will keep on an even keel and the trade tensions between the U.S. and China will be negotiated without a trade war.  

For the week, the S&P rose in the first three days and then fell the last two, erasing its advance for the year on Friday. The Dow Jones Industrial Average gained 0.4% for the week and the Nasdaq 100 Index advanced 0.6%. At first glance, It is one of the best earnings quarters of the bull market. Combined profits have exceeded Wall Street estimates by 7.8% and if sustained would be the highest since late 2016. However, stocks have risen less than 0.1% on average on the day after results and companies that missed estimates trailed the market by 1.7%. Results are not being rewarded and part of that stems from estimates that haven’t modeled the impact of the tax overhaul. Also, trade tensions are hurting the market. In the upcoming week, more than 180 companies in the benchmark S&P are due to post results. 25 of these companies are seen by Credit Suisse as most exposed to a trade war. Company comments about trade and tariffs could blemish what is expected otherwise to be a stellar earnings season. With 87 companies having reported so far, S&P profits in the first quarter are expected to have increased a whopping 20%, according to Thomson Reuter’s data.

 

The Federal Reserve’s Beige Book revealed that economic activity continues to expand at a modest to moderate pace in all 12 districts. Consumer spending remains strong. Residential real estate and construction were healthy, although inventory limits constrained activity in some regions. Outlooks remain generally optimistic across the board, but contacts in manufacturing, agriculture and transportation are worrying about newly imposed or proposed tariffs. Many firms throughout industry are grappling with the impact of the recently imposed tariffs, with many stepping back to reassess their investment plans in the wake of rising steel and aluminum prices. Many contacts were uneasy about tariffs that may be on the way, including farmers who are apprehensive in many industries.

 

The Federal Reserve’s report does reflect the current economic environment and the fact that not all is smooth under the waters. Trade aside, the outlook for the economy is fairly bright and the near-term outlook is favorable. Labor markets are tight and more pay raises should be forthcoming. Manufacturing is strong, despite a topping out of the auto sector. The financial system is in good shape. Rates are increasing and so are gasoline costs. Price increases in steel, aluminum and wood may start to hinder activity but generally speaking, construction remains positive. There is no doubt that a full blown trade war will hurt the economy. As long as policies stop short of actual conflict, the economy should expand modestly in coming quarters.

 

Next week is heavy on earnings reporting but light on the economic calendar. The Chicago Fed National Activity Index is expected to step back slightly in March. New home sales should see a modest advance in March. Durable goods orders are projected to increase at a more modest 1.7% rate after the 3.1% jump in February. The goods deficit is expected to narrow slightly. Finally, the first estimate of first quarter GDP is released, with growth expected to come in at 2.0%.

Latest Data

The U.S. Economy:

Business inventories rose 0.6% in February, matching January’s pace. Wholesalers took the lead with a 1% increase. Retailers advanced 0.4% and manufacturers added 0.3% to stocks. Motor vehicles and parts dealers saw a strong 0.9% increase in February. Excluding that sector, retailers saw only a 0.2% increase. Business sales arrested their January decline, rising 0.4% in February, following their 0.3% decline in January. The inventory-to-sales ratio held flat at 1.35 months. The I/S ratio is fairly high for this late in the cycle. The January drop in sales brought the I/S ratio back to where it was this time last year. Producers will take their cues from the broader economy, but may have to tap the brakes to keep stocks on a more even keel.

 

The NAHB homebuilder sentiment index inched down 1 point to 69. However, the index remains elevated, 19 points above the 50-point threshold, an indication the housing market remains strong. Out of the three components, sales and expectations edged down slightly. A shortage of homes remains a weight and price appreciation is up 6% from a year ago. Construction is having capacity problems and input prices are high. Housing consumer fundamentals are a plus, but interest rates are rising. Housing will remain positive, but only modestly.

 

Retail sales rose 0.6% in March, following a 0.1% decline in February and a 0.2% drop in January. Auto sales provided most of the March lift, rising 2.0%. Excluding autos, sales rose 0.2% and 0.3% excluding autos and gasoline. Outside of autos, sales were led by drugstores, on-store retailers and furniture stores. Sales fell at sporting goods stores, apparel stores, building supply stores, department stores and miscellaneous store retailers. Sales in March were up 4.5% from a year earlier. Weather likely slowed sales at building supply stores. Consumer spending should pick up. Job growth is still healthy and incomes are rising. The tax cuts mean more money in the consumer’s pockets. There are risks coming from higher prices from tariffs and equity markets have been uneasy so far this year. Higher interest rates will also slow spending. Still, the outlook is fairly solid and the consumer should pick up spending after the weak first quarter.

 

Residential construction rebounded in March. Housing starts increased 1.9% equaling an annual pace of 1.319 million units. Most of the March lift came from the multi-family sector, which rose 13.4% m/m. Single-family starts fell 3.7% in March. Permits rose 2.5% to an annual pace of 1.354 million units. Again, the multi-family sector provided the lift, rising 19%, while single-family permits fell 5.5%. March was a strange month for housing. The Midwest entirely led the starts component, more than offsetting declines in the South and West. Weather may have been a factor. Dis counting that factor, residential construction is still trending up at a slow pace. The industry is operating at full capacity. Construction backlogs as measured by units under construction and permits authorized but not started exceeds the housing boom of 1999-2002 and is approaching the 2006 peak of 1.6 million units. Meantime, the I/S ratio of single-family homes is close to its cyclical low point in 2012. Interest rates are rising, which will slow housing activity. All this suggest only a slow increase in housing activity can be expected over the next few quarters.

International:

China’s economy grew at a slightly faster-than-expected pace of 6.8% in the first quarter, fueled by strong consumer demand, healthy exports and robust property investment. Consumption accounted for almost 80% of economic growth in the first quarter, supporting the economy even as risks grow for Chinese exports. March retail sales grew 10.1% from a year earlier, the strongest increase in four months. Shipments to the U.S. jumped 14.8% in the first quarter, with analysts speculating that firms rushed out deliveries to the U.S, as tariff threats loomed. Industrial output expanded 6.0% in March, the slowest pace in seven months. Despite the first quarter strength, economic growth is projected to slow to the government target of 6.5% as the economy rebalances from the old growth sectors of investment, industrial output to consumption, services and tech sectors.

Important Data Releases This Week

The Chicago Fed National Activity Index for March will be released on Monday, April 23 at 8:30 AM EDT. The Chicago Fed Index is projected to fall from its 0.88 reading in February to 0.29 in March. Retail sales were solid in March as were building permits and utility production. However, the slim 103,000 increase in nonfarm payrolls will hold the index down.

 

New home sales for March will be released on Tuesday, April 23 at 10:00 AM EDT. New home sales peaked last year but have been struggling, held back by rising mortgage rates and limited supply. We still see a March increase to 630,000, up from February’s 618,000.

 

Durable goods orders for March will be released on Thursday, April 26 at 8:30 AM EDT. Orders are projected to rise 1.7% in March, following the strong 3.1% advance in February. Non-transportation and core capital goods orders are expected to both rise 0.5%.

 

March advance goods deficit will be released on Thursday, April 26 at 8:30 AM EDT. The deficit came in at $77 billion in February and we expect a slight improvement to $75 billion.

 

GDP (2018-Q1-advance) will be released on Friday, April 27 at 8:30 AM EDT. We expect the first quarter will come in at an annual rate of 2.0% versus the 2.9% advance in the fourth quarter. Residential and nonresidential investment will be positive, with net exports a negative. Consumer spending is expected to moderate to a 1.2% increase following the fourth quarter’s strong 4.0% rise. The GDP price index will inch higher to 2.4%.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

image_pdfOpen as PDFimage_printPrint Commentary